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There's a reggae song that advises "If you want to be happy
for the rest of your life, never make a pretty woman your wife."
Mechanics have been accused of charging women higher prices for
emergency road repairs. Airlines charge business travelers higher prices
than tourists. Car rental companies and hotels often charge cheaper
rates on weekends. Transportation companies often give senior citizen
and student discounts. Prostitutes charge servicemen higher prices than
their indigenous clientele. Gasoline stations on interstate highways
charge higher prices than those off the interstate. What are we to make
of all of this discrimination? Should somebody notify the U.S. attorney
general?

The fact that sellers charge people different prices for
what often appear to be similar products is related to a concept known
as elasticity of demand, but we won't get bogged down with economic
jargon. Think about substitutes. Take the reggae song's advice about not
taking a pretty woman as a wife. Pretty women are desired and sought
after by many men. An attractive woman has many substitutes for you, and
as such, she can place many demands on you. A homely woman has far fewer
substitutes for you and cannot easily replace you. Hence, she might be
nicer to you, making what economists call "compensating differences."

It's all a matter of substitutes for the good or service in
question. Business travelers have less flexibility in their air-travel
choices than tourists. Women generally see themselves as having fewer
alternatives for emergency auto repairs. A man might have more knowledge
about making the repair or be more willing to risk hitchhiking or
walking. A prostitute might see a sailor on shore leave as having fewer
substitutes for her services than the area's residents. Motorists
traveling from city to city are less likely to have information about
cheaper choices than local residents.

Politicians seem to ignore the fact that when the price of
something changes people respond by seeking cheaper substitutes. New
York City raised cigarette taxes, thereby making a pack of cigarettes
$7. What happened? A flourishing cigarette black market emerged.

In 1990, when Congress imposed a luxury tax on yachts,
private airplanes and expensive automobiles, Sen. Ted Kennedy and
then-Senate Majority Leader George Mitchell crowed publicly about how
the rich would finally be paying their fair share of taxes. But yacht
retailers reported a 77 percent drop in sales, and boat builders laid
off an estimated 25,000 workers. What happened? Kennedy and Mitchell
simply assumed that the rich would behave the same way after the
imposition of the luxury tax as they did before and the only difference
would be more money in the government's coffers. They had a
zero-elasticity vision of the world, namely that people do not respond
to price changes. People always respond, and the only debatable issue is
how much and over what period.

This elasticity concept is not restricted to what are
generally seen as economic matters; it applies to virtually all human
behavior. When a parent asks his child, "How many privileges must I take
from you to get you to behave?" that's really an elasticity question. In
other words, how high must the punishment price be for the misbehavior
in order to get the child to take less of it? It's easy to see how
elasticity applies to law enforcement as well. What must be done to the
certainty of prosecution and punishment to get criminals to commit less
crime?

My next article will focus on property rights, a
non-economic concept that has a heavy impact on economics.

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